The IRS is authorized to pay private citizens for information that helps it identify individuals guilty of tax evasion.
In 2012, Swiss bank whistleblower Bradley Birkenfeld received a record-breaking $104 million award from the IRS for helping uncover widespread U.S. tax fraud by Swiss bank UBS and numerous wealthy Americans.
Most tax whistleblowers will never see anything close to the award received by Birkenfeld, who is widely credited with lifting the veil of Swiss banking secrecy and whose information brought more than $5 billion in unpaid taxes from individuals and banks into the IRS coffers.
Cash awards to whistleblowers
The IRS pays awards to whistleblowers for reports of tax violations both large and small. There are two types of IRS whistleblower award programs:
- The large-awards program under 26 U.S. Code Section 7623(b): If the individual being reported has gross income in the tax year at issue in excess of $200,000 or the amount in dispute exceeds $2,000,000, the amount of the whistleblower award is between 15 and 30 percent of the sum collected.
- The small-awards program under 26 U.S. Code Section 7623(a): If the case does not meet the $200,000/$2,000,000 threshold set forth under Section 7623(b), I.R.C. Section 7623(a) provides awards of up to 15% of the sum collected, to a maximum of $10,000,000.
Awards are only paid to people who provide the IRS with federal tax information that is specific and credible (no speculation, no “educated guesses”), and which results in the collection of taxes, penalties, and/or interest from a noncompliant taxpayer.
Submitting a tip to the IRS
Whistleblowers have the option of submitting their information online through the IRS whistleblower hotline (Tip, Complaint or Referral Portal) or mailing or faxing an IRS whistleblower Form TCR to the SEC directly via the IRS Whistleblower Office. In addition to identifying information, the Form asks where and how the information was obtained, that evidence be included (unless impracticable), and that the Form be signed under penalty of perjury. The information provided to the IRS must be specific and credible – educated guesses and otherwise unsupported speculation will not be considered.
Note that if the whistleblower is already obligated by law to disclose the information, or where the whistleblower orchestrated or benefitted from the scheme to begin with, no award will be given.
Making a claim for an IRS whistleblower informant award
To make a claim for an IRS whistleblower reward, you must file Form 211, Application for Award for Original Information and send it to the IRS Whistleblower Office. The same form is used for awards under both Sections 7623(a) and (b). For individuals who are not interested in an award, instead of Form TCR and Form 211, they should complete Form 3949A, Information Referral or simply write a letter to the IRS.
Awards may be claimed for anonymous tips if filed with the assistance of an attorney.
Then you wait…
Whistleblower awards are issued from the taxes collected – critics of the whistleblower program state that the IRS is slow to act on informants’ tips. Furthermore, it takes approximately five to seven years to collect taxes from a noncomplying taxpayer. In the meantime, you wait.
Whistleblowers will be informed as to whether their claim is payable (and for how much) or that their claim has been denied. A claim may be denied for a number of reasons, including:
- The IRS already had the information you provided from another source
- An audit or investigation determines that there is no tax liability
- There is liability, but the taxpayer succeeds in a judicial or administrative appeal
- Collection cannot be made because the taxpayer has no assets from which a collection can be made
A whistleblower may appeal their award (or denial of their award) in U.S. Tax Court. Note, however, that small award (section 7623(a)) informants cannot file an appeal.
Whistleblowing awards are taxable!
Keep in mind that once received, a whistleblower award is subject to federal tax reporting and withholding requirements.
In Part II, we will discuss protection of tax whistleblowers.